Q3 2020 FMC Corp Earnings Call
Good morning, and welcome to <unk> third quarter 2020, <unk> earnings call.
C Corporation.
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I would now like to turn the conference over to Mr., Michael Worley Director of Investor Relations for FMC Corporation. Please go ahead Sir.
Thank you and good morning, everyone welcome to FMC Corporation third quarter earnings call joining.
Joining me today are Mark Douglas, President and Chief Executive Officer, and Andrew Sandifer, Executive Vice President and Chief Financial Officer Mark.
Mark will review, our third quarter performance, followed by a review of our business in Asia and the outlook for the rest of the year.
Andrew will provide an overview of select financial results.
Following the prepared remarks, we will take questions.
Earnings release, today's slide presentation.
Are available on our website and the prepared remarks from today's discussion will be made available after the call.
Let me remind you that today's presentation and discussion will include forward looking statements that are subject to various risks and uncertainties concerning specific factors, including but not limited to those factors identified in our earnings release and in our filings with the Securities and Exchange Commission.
The information presented represents our best judgment based on today's understanding actual results may vary based upon these risks and uncertainties.
Today's discussion and the supporting materials will include references to adjusted EPS adjusted EBITDA adjusted cash from operations free cash flow and organic revenue growth all of which are non-GAAP financial measures. Please.
No that is used in today's discussion earnings means adjusted earnings and EBITDA means adjusted EBITDA.
A reconciliation and definition of these terms as well as other non-GAAP financial terms to which we may refer during today's conference call are provided on our website with that I will now turn the call over to Mark.
Thank you Michael and good morning, everyone.
The third quarter was an exceptional quarter for our company even in the face of persistent challenges posed by COVID-19, and severe headwinds from foreign currencies. We grew our revenue by 15% organically EBITDA by 20% and he P.S. bikes that 2%.
This performance highlights how portfolio strength balanced geographic and crop exposure as well as a sharp focus on execution and cost.
On the latter point as we progressed through the quarter, we sold the Brazilian season was getting off to a very slow start due to hot dry weather, which in turn made it difficult to get the pricing we had planned to upset the ethics headwinds.
To counter this situation, we aggressively managed costs in the quarter and were able to achieve the strong overall performance.
Let me now turn to the impact of COVID-19 pandemic on that'll business.
As we said last quarter, all manufacturing facilities and distribution warehouses remain operational and fully stopped.
A majority of that same sees other employees continue working from home, but some of which I have just not this isn't about trees weapon much it by local authorities.
We have had zero COVID-19 transmissions in all facilities and continue using a variety of best practices to address risks.
Well, we saw very strong demand for our products in all four regions of the world in the quarter there were pockets of demand reduction related to the pandemic. This.
This impacted certain color and fruit and vegetable markets.
We expect this level of localized disruption to continue into full quota and potentially into 2021.
Following the outperformance in Q3 with our outlook for Q4, we are raising the midpoint of our EBITDA EPS and free cash flow guidance and tightening these ranges.
Underlying demand for our products remains healthy supplemented by market access expansion, new registrations, and an increasing impact from our pricing actions as we entered Q4.
Turning to our Q3 results on slide three we reported nearly $1.1 billion in third quarter revenue, which reflects a 7% increase on a reported basis and 15% organic growth.
After removing the FX impact our business saw double digit growth in India, Australia, Pakistan, Brazil, Germany, Italy and Canada.
Adjusted EBITDA was $263 million, an increase of 20% compared to the prior year period.
EBITDA margins were 24.2% an increase of 260 basis points compared to the prior year, driven primarily by cost control measures.
Adjusted EPS was $1.22 cents in the quarter, an increase of 30%. That's is Q3 2019.
This year over year performance was driven mostly by the increase in EBITDA well.
Well much smaller impacts from DNA interest expense tax rate non controlling interest and share count largely offset each other so.
Finally relative to our Q3 guidance. The 12 cents beat was driven most almost entirely by our $18 million EBITDAR outperformance versus the midpoint.
Moving now to slide full Q3 revenue increased by 7% versus prior year, Despite an 8% FX headwind as high volumes contributed 12% to growth and pricing another 3%.
In Asia revenue increased 16% year over year, and 19%, excluding FX, partially due to favorable weather conditions in both India and Australia.
Sales in India grew over 20% organically as the good monsoon drove demand from growers of rice, soybeans pulses, sugarcane and fruit and vegetables in the south and central markets.
Hi, beside sales in Australia were up over 50% led by cereals and canola.
Like you said also grew in double digits, driven primarily by insecticides in rice in color.
In North America sales increased 8% year over year, driven by increase planted areas in soybean corn and rice as well as continued market expansion about fungicides loose until and right.
Sales in Canada were robust driven by cereal herbicide blends from our patented pricy <unk> technology as well as insecticides.
We broke a record in Canada this year for Akers using precision prep products.
And the best formulation based on Rynaxypyr insect control and by censoring is doing very well and its first launched yet.
Heading into the winter, our U.S. channel inventories are in better position compared to a year ago, which should lead to good restocking later in the fourth quarter.
Sales in EMEA increased 10% year over year, and there was no FX impact.
We saw strong demand for an exit for insect control applications for specialty crops as well as battle Delta herbicide for cereals, particularly in France and Germany.
Latin America sales grew 1% year over year and 18% excluding FX.
Grower sentiment is strong but the season started very slowly due to hot and dry weather in Brazil, Argentina and Paraguay.
Pricing actions across the region offset some of the currency headwind, although we expect pricing to have a larger positive impacts in Q4 than it did in Q3.
In Brazil sales grew double digits organically led by our growth in the soybean milk it.
Due to the late start in Brazil channel inventories are higher than normal for this point of the year for us and the industry.
We fully expect this will be worked down as planting catches up now that the rates of return.
Mexico sales grew organically, but was still impacted somewhat by COVID-19 related pressures on the growers that export fruit and vegetables.
Sales in the Andean zone grew significantly as conditions in that sub market improved.
Turning now to the third quarter EBITDA bridge on slide seven.
We had very strong operational performance as a 17 million dollar contribution from volume.
34 million dollar contribution from lower costs, and a 26 million dollar benefit from higher pricing more than offset an $86 million FX headwind.
The volume contribution was double what we had forecast.
Partially due to the robust market growth in India and Australia.
In addition stronger than anticipated volume growth in Brazil was also a key driver.
However, this did drive an increase in the FX headwind in the quarter.
We had significant cost savings in the quarter well above guidance given on our last call.
Approximately 8 million of the 34 million dollar cost savings you see on this bridge a cost that were delayed into Q4.
We had excellent cost discipline, including additional accelerated Sep synergies.
Taking a step back now we'll turn to slide six as.
As we did for Latin America last year, I'm going to highlight a region, where we are seeing significant growth.
Asia may be the most diverse about four regions and therefore it is the most complicated to understand.
We are currently the fourth largest crop protection chemicals provider in the region with sales of around $1.1 billion in the 16 billion dollar market for about 7% market share.
This region is the most seasonally balance that the full Linda because it has significant markets in both the northern and southern hemispheres.
We manage the Asia business in five sub regions with India, North Asia significantly larger than the other three but we do have aggressive goals to grow in all of them.
Not surprisingly rice makes up about 35% of our sales in the region. In addition.
Some vegetables are large and diverse set of crops spread across all countries.
Our crop diversity in Asia provides numerous opportunities to grow and.
And it also mitigates the risk of our results being overly impacted by a pool season in any single crop.
Similarly, our geographic mix in the region is also very diverse.
Moving to slide seven for a look at how our Asia business has expanded since 2014.
We have made two large acquisitions since then coming over in 2015, the Dupont crop protection business in 2017.
Through these acquisitions, we added a large active ingredient manufacturing plants in India, and two active ingredient manufacturing plant in China.
Along with several formulation plants, R&D labs and field trial sites across the region.
Total sales were about $350 million in 2014, while this year, we expect to be about 1.1 billion.
This is in part due to a fundamental restructuring you're about India business, which we implemented in 2018 that enabled increased market penetration and efficiencies that improved profitability significantly.
I'll walk through some of the sub region highlights to provide color on the crop diversity country exposure on recent commercial activities, we have in the region.
The five sub regions include Australia, New Zealand Southwest Asia, North Asia as he had an India.
In the Australia, New Zealand sub region, our annual revenue is about $100 million to $130 million and a $2 billion market.
Our market access model is by a large distribution and retail companies supported by our own sales groups.
Australia is predominantly a cereals market well, that's all very excited to be preparing for a launch of ISO flex overlooked herbicide in 2020 one crop season.
Earlier this year, we began engaging retailers with a large scale demonstration plot program.
I said flex is a new mode of action in cereals, and it delivers high performance leads that are developing resistance to the other herbicides in the marketplace.
The southwest Asia sub region encompass in Pakistan, Bangladesh, Sri Lanka in mine mouth is the smallest market of the five but our annual revenue of approximately $110 million to $140 million equates to a market share of approximately 30%.
In Pakistan, we have a unique market access model comprised of FMC owned retail outlets selling our full range of products.
This model has facilitated our growth to beat the market leader.
We see rapid run exit the insect control expansions for sugarcane on coal and applications.
Moving to the North Asia sub region, which includes China, Japan, Korea, and Taiwan, We had annual revenue of approximately $290 million to $320 million and a $9 billion bucket.
In Korea.
We successfully launched Koodo bio stimulants in 2019 for use in fruits and vegetables, and we are preparing to launch two new microbial bio pesticides later this year.
In Japan, we've seen strong demand for diamonds, particularly in the rice nursery bulk segment.
In China the market is highly fragmented.
Business is focused on rice, and fruits and vegetables due to the customer fragmentation, we go to market by a local distribution and retail companies.
So as the end sub region includes Indonesia, the Philippines, Thailand, Vietnam, Cambodia, Malaysia and Singapore.
In all these countries, we walk through local distribution and retail companies.
This is especially important in the large Indonesian market given its fragmented geographical nature.
In 2020, we also expanded our market access to additional parts of Indonesia, similar to what we have done in India.
In the sub region, we have an annual revenue of about $110 million to $142 million in a $2 billion market.
We see strong rynaxypyr insect control sales for rice as well as growth of Cyazypyr on fruit and vegetables, driven by label extensions.
Moving finally to the India sub region, which generates approximately $370 million to $400 million in annual revenue for us.
On slide eight we take a deeper dive into this 3 billion dollar market, which has significant structural opportunities for agricultural growth.
To start it has more arable land than any other country in the world in fact, India has 30% more arable land than China, and nearly twice as much as Brazil.
This presents incredible growth opportunities for FMC with very strong footprint and market penetration.
You can see in the essentially the slide that yields are very low in India, driven by low usage of crop inputs on.
On Rice for example, India's yield per acre is half of that of Brazil, and less than a third of the yield in China.
On cone India's yield is half of that in Brazil, and less than 20% of the yields seen in the U.S.
The market is dominated by small gross who do not have the scale to mechanize their operations that being said there are meaningful growth opportunities as these small growers recognize the benefits of investing more in crop inputs.
Moving to slide nine India today, it's about a 3 billion dollar market for crop protection and we see market growth of 6% through Twentytwenty five taking the markets and nearly $4 billion by that time.
Insecticides make up about 45% of the market today with herbicides and fungicides about 20%, each and plant health and biologicals, making up the remaining 15%.
As you can see on the right side of this slide the crop mix is similar to that of the Asia region, with rice, and fruit and vegetables, making up nearly 60% of the market.
In a market that is highly fragmented by both geography and a multitude of crops. We are there are as we said significant opportunities to grow.
In India, we have a unique market access model, we have exclusive distribution with five major companies that are supported by sales and marketing resources to drive geographical and portfolio growth.
This model is currently under expansion as we look to service all of the India market.
FMC has developed commercial initiatives in India to expand our market share. This includes crop and geographic expansion about diamond brands, such as Corrigenda viterra as well as eight new herbicide fungicide launches since 2018 that are expected to drive sales of $70 million by 2023.
And with that ill now turn the call over 200.
Great. Thanks, Mark let.
Let me start this morning with a few highlights from the income statement.
FX was a larger than anticipated headwind to revenue growth in Q3 at 8% versus our expectations at a 6% headwind.
The Brazilian real as the vast majority of this headwind followed by the Indian rupee, Argentinian peso, Pakistan rupee in Turkish lira.
We took substantial pricing actions and were able to recover about one third of the FX headwind in the quarter.
We continue to expect FX headwinds to remain at an elevated level throughout 2020.
The pricing covering about half of the FX headwind at revenue in the year.
Interest expense for the third quarter was $35.5 million down $6.1 million from the prior year period benefiting from lower term loan balance outstanding lower LIBOR rates and lower foreign debt balances.
These were partially offset by higher bond outstanding following the debt offering we completed in the prior year quarter.
We now anticipate interest expense between 150 and $155 million for the full year.
Our effective tax rate on adjusted earnings for the third quarter was 13.5%.
We now expect our full year tax rate to be in the range of 13% to 14% with the midpoint consistent with the tax rate through the first three quarters of the year.
Moving next to the balance sheet and liquidity.
Gross debt at quarter end was $3.2 billion down $300 million from the prior quarter with strong free cash flow leading to lower short term financing.
We continue to carry some excess cash due to heightened uncertainty caused by the coated pandemic.
Gross debt to trailing 12 month EBITDA was 2.5 times at the end of the third quarter or 2.4 times. If you consider the nearly $175 million of surplus cash on the balance sheet.
This is consistent with our targeted annual average leverage of 2.5 times or less.
Moving on to slide 10, the cover cash flow and cash deployment.
Free cash flow for the third quarter was $315 million up more than 50% from the prior year period.
Adjusted cash from operations was up $75 million with breadth and trade working capital more than offset by higher EBITDA lower change and other assets and liabilities and lower cash interest.
Collections continued to be strong in the quarter, surpassing our expectations.
Capital additions were down $27 million consistent with our updated expectations for full year investment.
Legacy and transformation spending was down $15 million due to timing of expenses and ramp down of our transformation efforts.
For the nine months ended September Thirtyth free cash flow of $148 million is nearly $230 million higher than the prior year period.
Change in other assets and liabilities lower cash interest and taxes lower capital investment as well as growth in EBITDA above growth in trade working capital all contributed to the year on year improvement.
As we look to year end, we are raising our full year free cash flow guidance to a range of $475 million to $525 million, an increase of nearly $200 million at the midpoint versus the prior year period.
We anticipate deploying more than $170 million of free cash flow in the fourth quarter.
We paid $57 million in dividends on October 15.
Closed on the $65 million or acquisition of the remaining rights to the fungicides blend of here in early October.
And expect to repurchase $50 million of FMC shares.
We resumed share repurchases at the beginning of October and have completed $20 million of repurchases today.
By year end, we will have deployed nearly $350 million of free cash flow, while maintaining excess liquidity throughout the pandemic. This.
This includes the $115 million being deployed in Q4 on the acquisition and share repurchases as well as the nearly $230 million that will be returned to shareholders. This year via dividends.
Moving next to slide 11.
FMC is making good progress in both improving our free cash flow conversion from earnings as well as growing the absolute amount of free cash flow we generate.
As you can see on the left hand side of this slide at the midpoint of our increased guidance range. We now expect improved cash conversion by 21 percentage points compared to last year, while Brian cash flow by nearly $200 million.
We continue to believe that we have substantial headroom to improve further on both free cash conversion and the absolute free cash flow, we generate particularly as we complete our asset implementation and end the period of high cash spending on transformation efforts this year.
On the right hand side of this page you can also see the breakdown of free cash flow generation by semester for last year and this year.
Note that the seasonality is similar in both years with negative free cash flow in the first half of the year and strongly positive free cash flow in the second half, but with improvement in both semesters and 2020 versus 2019.
Finally, a quick update on progress in implementing our new assay system are.
Our final go live is under way as we speak with the remaining 40% of FMC moving onto the new system. This month.
Following this go live will have a single modern system across the entire company for the first time in our history, which will enable significant efficiencies in our back office processes.
As we prepare for this final go live we've accelerated more synergies that were planned for 2021 into 2020.
We continue to expect total synergies $60 million to $80 million from implementing the new system, but we now expect to capture $50 million incentive fees and 2020.
Meaning $10 million to $30 million to be achieved largely in 2021.
And with that I will turn the call back over to Mark.
Thank you Andrew Sunny.
Turning now to overall market conditions with only a couple of months left to go in Twentytwenty. We continue to expect the global crop protection market will be flat to down slightly on a us dollar basis.
Although our view on the regions has changed slightly.
The outlook for Europe continues to worsen following a hot dry summer. We now believe that market will be down low single digits year over year less is flat in our prior full cost.
Offsetting this we expect the Asian market to be up low single digits versus our prior forecast of being down slightly due to much better weather conditions in India, Australia and as yet.
Our forecast for Latin America, and North American markets are unchanged at down to low and mid single digits up low single digits respectively.
All these forecasts are for the market not at FMC and they are in us dollars.
Moving to slide 12 in the review of Fmcs full year, Twentytwenty and Q4 earnings outlook.
As I said earlier, we are raising our guidance for the full year, we are still facing significant FX headwinds and impacts on both cost and demand from the global pandemic.
But the underlying demand for our products and our ability to control costs led to our improved outlook.
FMC full year Twentytwenty earnings are now expected to be in the range of $6.45 to $6.57 per diluted share a year over year increase of 7% at the midpoint and six cents above prior guidance.
The $50 million in share repurchases planned for the fourth quarter will not impact our full year share count as the buybacks it too late in the year to well to the math for the EPS calculation.
Twentytwenty revenue is forecasted to be in the range of $4.72 billion to $4.78 billion, an increase of 3% at the midpoint versus 2090.
9% organic growth.
We believe the strength of our portfolio will allow us to deliver high single digit organic growth continuing a multiyear trend of above market performance.
EBITDA is now expected to be in the range of $1.295 billion to $1.315 billion, which represents a 7% year over year growth at the midpoint.
Guidance for Q4 implies a year over year sales growth of 5% at the midpoint on a reported basis and 10% organically.
Led by continued strength in Asia. In addition to the global strength about guidelines business.
We all focus in EBITDA growth of 8% year over year at the midpoint.
EPS growth is forecasted to be flat year over year limited by the large positive tax adjustment in Q4 2019.
Turning to slide 13, and full year EBITDA and revenue drivers.
Revenue is expected to benefit from 6% volume growth with the largest growth in Asia, and Latin America on a 3% contribution from higher prices.
Next is forecasted to be a 6% topline headwind.
We have raised our EBITDA guidance by $10 million.
Midpoint, reflecting the outperformance in Q3, while recognizing the delay of $8 million of cost into Q4.
We now expect higher contribution from volume growth and we are also generating higher cost savings as well as earlier realization of some S&P synergies.
We now forecast, an FX headwind of $247 million for the full year.
It is $230 million prior forecast.
On an EBITDA basis, we now expect pricing to cover over 55% of the FX impact in the year and pricing will come from all regions led by Latin America.
Moving to slide 14, where you see the Q4 drivers on the revenue line pricing and volume are expected to drive the topline strength.
Regarding EBITDA drive as pricing will have a larger impact in Q4 than it did in Q3.
To wrap up we executed very well in the quarter, both from an external perspective in driving demand across all regions, but also importantly internally by focusing on cost control and delivering critical activities that will drive our future performance. This includes preparing our goal either that's it be continuing to drive our R&D pipeline forward.
And keeping priority capital projects on track.
Q4 is an important quarter for cash and we all focused on cash generation as well as demand generation we.
We remain confident in our ability to drive above market performance once again.
And with that ill now turn the call back to operator for questions.
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And the first question today will be from Christopher Parkinson with Credit Suisse. Please go ahead.
Great. Thank you very much.
So on the free cash flow conversion fronts, there's still few moving parts.
But your peers are definitely in the right direction, just given your more stringent definition can.
Can you just give us an update on some of the key initiatives, you're mentioning as well as some low hanging fruit, which still exists for 21 and even 22 just.
Anything that could further at this in the pathway to over 80% conversion eventually thank you.
Sure, Yes, let me just give a couple of high level comments before under jumps in on the details one of the one of the reasons, you're seeing us move outs.
Our free cash flow conversion and ultimately the Dol as is the the reason I think one of the primary reasons is the focus weve placed on cash as an organization.
I think it's important to note that all the executives and senior managers now have a free cash flow component in the long term.
Incentive rewards for the company.
I do believe that that has helped change our view of free cash flow and how we go about delivering that for the company. So thats an important backdrop for for everybody on the call as to how you think about as driving not only.
Things, but also free cash flow under if you want to talk about a couple of the drivers. The sure. Thanks. Thanks, Mark I think certainly a strong quarter and year to date on cash flow for this year.
That very strong focus in markets talking to see that and the way we've been able to manage the growth of working capital. In particular also been benefited by some deferral of cash tax items under the cares Act and lower cash interest based on that the refinancing and lower rates that we've seen.
As I think about free cash flow and from a big picture perspective, I think Chris to your opening comment and certainly just to level set when FMC talking about free cash flow, we're literally talking about the cash left over to either pay dividends buyback shares or make small acquisitions like that that will interfere fungicide acquisition that.
We closed in October.
Everything else is built into that number all of the legacy liabilities all of the investments required to continue growing the business that we really are driving towards what we have in terms of free cash flow that can be deployed.
As we looked at 20 to 21, certainly we fully intend to take advantage of the new S&P system, which will give us some new tools and a much better visibility into working capital to continue to drive working capital improvement but.
But structurally speaking and certainly we're spending over $100 million this year cash to finish out the implementation and finalized all of our transformation efforts, resulting from the acquisition of the PON business, yes that $100 million is a tailwind to the cash flow going into 2021 that is always the other moving parts.
Capex is a bit lower this year, so that might be at it certainly should expect a bit of a tick tick up in Capex next year.
The legacy portion should be relatively stable and then the and the remainder will be driven by our effectiveness and organic growth and driving that increase in growth and take the cash flow. So.
So I think people should continue to expect that we show progress on that trajectory and we think this business should be in the 70% to 80%.
And then in the midterm above that in the long term for free cash flow conversion certainly I'd. Just also not that steal too much Thunder I am going to grab a few minutes at our upcoming Investor day on two weeks off although it's largely focused on R&D will spend a few minutes to talk about cash flow cash conversion and capital deployment policies at the end that event as well.
Thanks.
Great. Thank you very much.
The next question will be from PJ Juvekar with Citi. Please go ahead.
Yes, hi, good morning.
Mark and Andy we do it.
No you had a big impact from FX in Latin America, there was negative 17%.
Can you go back to your hedging strategy I know that you elaborate and well talk about hedging strategy.
Hedge as orders come in.
Just kind of describe that are you trying to hedge revenues net income and.
And just talk us through that and what happened in the quarter. Thank you.
Yes, sure PJ, let Andrew talk about the details of the hedging policy, which we talked about on on a couple of calls previously.
I do think though overall when you have these types of movements, whether it's short term volatility our long term move.
Movement in the currency price is the most effective weapon for closing that gap I mean, encouraging obviously helps it is important for us to understand what we believe the performance of the company will be an hedging allows us to do that it.
It is complicated make no mistake, but I think we do a pretty good job of managing that exposure, but it really comes down to the commercial groups to manage the price list and how they move price in any one jurisdiction Andrew do you want to talk about the hedging policy sure.
Thanks, Bart I think left our hedging policy our hedging program is all designed around increasing the probability of being able to deliver against our guidance and give the expectations that we set there is no hedging program that can protect you fully from year on year changes in currency.
At any kind of economic basis. So we're not trying to go to zero FX impact we are trying to maintain an FX impact within a range that we can manage through the rest of the TNL through through the pricing actions in business that we have.
Our hedging approaches.
Pretty well.
In place for several years now.
We start from yeah from an anticipation of sales with time, we give direct guidance through.
Through entering in commercial terms with customers through the time, we actually.
Issue, an invoice and creative receivable and while the specific tools and levels that we hedge at very at each part of that lifecycle.
We have a very high coverage all the way up to 100% once we have a receivable on the books.
Looking at Q3, specifically you know when you look at what we guided coming into the quarter, we'd expected at EBITDA that 60 million dollar headwind from FX and ended up being about 86 million dollar headwind from FX.
Part of that is it again no hedging program covers 100 presented the movements and there were some movements beyond from what we anticipated, but the real driver was we ended up seeing some opportunities to grab more business and the mix of business in Latin America being more heavily denominated and BRL than what we had forecasted so without higher volume of BRL denominated.
Added sales each one of those sales brings with it a debt an increased amount of FX headwind.
So the real Delta in the quarter was the impact of higher volumes.
And again I think we're we're happy with the way the hedge program is performing its.
Yeah. It doesn't take all the rest off the table never can but it does help us increase our ability to manage the performance of the company to meet expectations that we're setting.
Okay.
And the next question will come from Laura Fray with exactly the BNP. Please go ahead.
Yes, good morning all.
My question is on pricing I guess two parts.
So just wanted maybe could you talk about the I guess.
Same to the punch sanya around to bridge.
What do you think you came up a bit light leave us guidance on Q3 pricing three versus six.
More importantly, how did you think about pricing going into Q4, and 2021 cents in Ventura County.
Especially in the northern any sense. Thank you.
Yes, thanks Laurel.
Let's take the first one first the Q3 pricing I said it in the scripts and we certainly saw this as we rolled through Q3 into into Q4, the Brazilian market was extremely stressed.
We probably think that market was delayed by about 30 days in terms of planting. It was just so hot and dry unprecedented weather.
That causes all sorts of frictions in the in the channel as you can imagine and our ability to move price to the degree that we thought it was just not as we had planned when we gave guidance in early August.
So we responded to that we had opportunities in the marketplace, especially in the soy complex to going move volumes, which we did very successfully but we didnt get as much price now what does that mean going forward well certainly the price lists.
Going forward for Q4, we.
We are at the high level, because thats already been negotiated so we do have confidence in the price that's going forward, but we come at about 55% of the total impact of FX in the year.
It's going to take us through part of next year and all the way into the next beginning of the next season in Brazil to recover the rest of the assuming that FX stays where it is today.
You just don't recover those sort of increases in warm season. It is just too much.
And you can expect to grow to absorb that we will continue in Latin America to push price as we go through the season and also we're looking at price and we'll be looking at price in the other regions as they come into the new season in Twentytwenty. One so expect us to be expected to be on this all the way through next year, and then we'll wait and see where we are.
Get to in Q3 next year for the for the 2021 22 season in Latin America.
On the other part of your question Lora was channel inventories.
I'll give a quick run around the well because I'm sure. There are other people have that same question in mind.
In North America, particularly in the US we feel were in much better shape than we were a year ago.
We were very explicit as we went through this year. The fact that we felt following the very poor year end 2019 in terms of weather that we had more pre emergent herbicide channel inventory that we would like and that was the case, we'd be very diligent in drawing that down this year and we feel very confident that the levels. We're at now our average levels, where we can compete.
From a channel inventory perspective, and it should it should bode very well for a good restocking at the end of this year getting ready for the U.S. season in Q1.
In Europe, I believe channel inventories are high not not everywhere, but just given the weather conditions, especially in northern Europe.
I expect that hub, besides some herbicides and insecticides and fungicides will be high in Europe, It's something we've got to have to watch out for as we go into the next season starting in Q1.
In.
In Asia, I think India is in good shape monsoon was very very good.
So a lot of a lot of drawdown of inventories that not that they were particularly high.
As the Ana has improved a lot Indonesia is looking much better now more average for us all.
Australia is really got back on track excellent season, given the drought we've seen for the last two or three years, Australia is good I would say more inventory than we would like in China for those of you that watch the situation there was significant flooding during the season.
Which did reduce demand. So we think China is a little heavy on inventory and then moving down to Latin America, Obviously, Brazil is the major focus the right now inventories are high but that's got nothing to do with how we feel about the market growth sentiment is very strong we expect acreage to increase once again local.
Prices a strong so the market is very buoyant. It is just purely a delay in the usage of products at this point.
It it in perspective for you I can tell you we always look at how much was selling and what the market can take and we have not sold in the market can take in Brazil. So we feel very confident that once once supply something really gets going which is now the rains have arrived that Brazil will be in much better shape as we end the season.
Perfect. Thank you.
And the next question is from Stephen Byrne with Bank of America Securities. Please go ahead.
Yes, your deep dive in India was very interesting it would seem that the Indian government is pretty supportive of it.
They subsidize crop prices and fertilizers I was curious.
To your view.
So whether there was any kind of a structural reason why crop chemical use is as low as as you highlight.
The.
The distributors that you used there do they provide in the agronomic advice similar to what Syngenta is rolling out in China.
Or might you consider expanding.
Your your retail network that you have in neighboring bring with shouldering. The Nvidia is that a possibility.
Yeah, I think Steve Thanks for the question I listen.
Listen I think it is such a fragmented market.
That that whole complex of offering advice and developing the market itself has been slow to uptake I think the value of the goods now getting to a point, where the grow us see the inputs us for improving.
The fertilizer usage crop protection seed quality there.
They are exporting more from that market. So that fall there is more of an incentive to invest.
We certainly from an agronomic advice, given the fact that.
Our full distribution partners plus the sales and marketing focus that we have that do gave agronomic advice to the growers to help them improve the yield and educate the grow is on on what is happening.
I don't see us going to a model, where we have FMC stores in India.
There is a difference between the Pakistan market and the Indian market. The India market is just so much bigger a more fragmented.
We did a lot of business prior to the deposit acquisition through small retailers and I can tell you a lot of people focus on the PNM for the business, but when youre going direct to retailers in places like India. You have to have a large balance sheet to support that we felt that was not the right way to go.
So we we took the the five distributor model and expanded it but I don't see us going to FMC stalls in India, I don't think Thats, the right model for us in that country.
Thank you.
And the next question is from Adam Samuelson with Goldman Sachs. Please go ahead.
Hi, Thanks, good morning, everyone.
So I was hoping mark Andrew just reflection, a little bit year to date.
And with what's implied in the guidance is pretty clear and I.
Outgrowth that FMC is continuing versus the global crop protection market, just love to get your kind of view on kind of the key drivers.
And the sustainability, whether it's just product its geographic exposure kind of your your channel inventory position just how you think about your outgrowth versus the market this year and kind of the sustainability of that.
Yes. Thanks.
So.
A couple of things first of all just the way you.
Do you think about our business and I know I know, we talk about this a lot, but that geographic balance and the crop balance is very important.
Plus the fact that if you think about the size of our business, what roughly almost $5 billion in a $58 billion market, we have a 9% market share 8% to 9% there.
There is plenty of room for FMC to grow we don't need the market to be growing mid single digits for us to grow up mid single digits.
I think the whole area of how we are expanding our franchise and I'm not just talking about the dialyzer I'm talking about the pipeline of products that is coming the crops that we have I've talked before about the number of registrations that we continue to add to our portfolio, which drives future growth.
You think about products. This year, we have about $70 million of new revenue from products that were launched this year.
So that's what one and a half almost 2% of revenue growth just from products that were launching without the rest of the portfolio moving into new crops. So.
Geographic expansion is very important not only are we seeing that in India as we've been very deliberate in moving out to certain parts of the country, where we've not had presence we're doing it Indonesia, we're looking at our China business in terms of which provinces, we need to expand into and then surprisingly enough. We're still doing it in Brazil, we are looking at.
Market access in different parts of Brazil, how do we take more share with the the quality of the portfolio. So it's it's not one silver bullet there are a number of components that we have to keep working on to continue to drive this outperformance of the market and we we strongly believe we can continue to do that.
Great. Thank you so much.
The next question is from Mark Connelly with Stephens. Please go ahead.
Thank you I was hoping we could come back to the to the pricing question for a moment you.
You've obviously got a pretty amazing record of offsetting effects costs in Brazil overtime and that doesn't look difficult as time goes on strike farmers are but with your discussion of Asia. I was wondering if you could talk a little bit about how pricing is evolving in that market given that so much of.
That market has a historical bias towards generics and.
Pricing has been difficult there in the past.
Yes.
Yes, thanks both.
You can see when when we talked about the FX impact you know Andrew highlighted the BRL was one of the major impact, but there are a number of other currencies than most of them in Asia.
We do move prices have moved price in Asia. This year, not as robustly as as as Brazil, given the size of that market.
But we do get price I think I think what you've got to think about in terms of the.
The generic side of this business.
You look at our business today, if you think about fed policy products, which for us are essentially.
How you think about the generics, how we think about generics X probably only about 5% of our total portfolio.
So competing with generics is one thing when you compete with the same technology competing with what we call value in use so the value the growing strong using your products through either removing a past to improve yield productivity, that's where the real color of the businesses. It is that value the grow was wished to two.
Perfect and think about it.
Generally prices are looking better I know people always focus on soybean and corn in the us markets or in the Brazilian market, but well we are around the world rice prices are not particularly that sugar prices are not particularly bad fruit and vegetable prices are moving all over the place given the demand.
Has changed due to covance, but generally speaking grow is in Asia now are looking at being more profitable and therefore are willing to spend on the highest quality inputs that drive that yield and profitability. So we think of it that way rather than the generic market itself.
Super Thank you.
And the next question will be from Vincent Andrews of Morgan Stanley. Please go ahead.
Thank you very much and good morning, everyone, maybe just to get back to the Asia or India discussion a little bit.
Just wondering sort of as you look at the growth plan there how much of it's just going to come down to.
Continuing to penetrate your existing molecules versus is there going to be and I don't want to front run your R&D day, either but they are going to be a story about simply about.
New products that are going to have good applicability there or is there also.
Maybe an M&A roll up opportunity in the region that might make sense or is that a bit of all three thank you.
Yeah, it's a bit of the first to not necessarily the last one I think Vincent.
Yes, we do have geographic expansion and also crop expansion in India.
Those fruit and vegetable markets themselves are highly fragmented. So we've talked before as I said about the registration profile and our increasing that India plays a significant role in getting our products on to more crops in different parts of the country.
Certainly I am not going to go into all the details of the pipeline. We can do that in two weeks, but yes. The pipeline has applicability in India.
I also think there was some agronomic changes going on that we see that are benefiting us.
Ill give you an example in Brazil, the sugarcane business is highly mechanized.
In India. It is not yet they're all labor shortages, so in Brazil, where we are a leading provider of besides for the for the sugarcane market.
Were now building a pre emergent.
Beside business in sugarcane in and in India, which is a brand new market. It used to be manually controlled and now they are using starting to use pre emergent herbicide. That's a great example of a market that didnt exist. A few years ago that is now growing rapidly and we can transfer technology and know how from Brazil.
To India and in fact in the past in the past few years, we have had India sugarcane growers go to Brazil to see the difference between the agronomic practices. That's all investments that allows us to continue to expand our market share in a market growth.
Thank you and the next question will be from John Roberts with GBM. Please go ahead.
Thank you, maybe just to give us a little bit of preview if your technology day sounds like you're having good success in the combinations of the Dynamites, maybe you could comment what percent of the Diamond sales are currently in combinations and what would you think that will be a few years from now.
Yes, John we don't actually break out water straight products versus what a formulated products.
But certainly we are having success.
We talk about the out of US we just launched we've got a couple of others coming this year.
I don't think it will ever make up the vast majority of of our sales into this space, but certainly as we fragment the market and some of the partners that were working with as they look at the sales. They are also likely to have mixture products that they will do so.
May not be that FMC has those mixture partners all those formulated products, but our partner companies will have so you will see a growth in that type of.
Out of the market, but we might not necessarily have that ourselves. We will have some obviously because we're working on that but I think the general market itself will continue to fragment with mall formulated type products.
Thank you.
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The next question is from Frank Mitsch with Permian Research. Please go ahead.
Yes, good morning, folks and an impressive results here in the third quarter.
As far as I look at your as your results for this year and the guidance for the fourth quarter. It really looks like things are accelerating in the back half of the year. So that naturally gets my mind thinking about the first half of next year and some of this accelerated growth in your results in the back half of this.
Here on a run rate basis.
Probably implies.
Hey.
Pretty good first half of 2021 am I thinking about that correctly.
How how would you handicap kind of the kind of the run rate heading into next year.
Yes, Frank.
Frank can you can't necessarily say that the first half of next year is the same as the second half of this year purely because you know you look at our growth rates in Q3.
And especially in Q4 for Latin America, and Asia in particular play a significant role will let Asia business.
It is not necessarily as big in Q1 off Q2, not far off but certainly Latin America is much lower in Q1, and Q2 than Q3 and Q4. So I think you've got to be careful in that that we never looked at the business sequentially. It's not something we do because we look at it from a seasonality perspective.
Now do we have traction, yes, obviously, we do given the market growth rates, but we're right in the middle of our budgeting process at this point.
Just to give you.
Sort of a broad view of the market itself because I don't have FMC is internal internal numbers, yet, but broadly speaking the market. This year is is down low single digits I.
I would expect the market next year to be sort of flattish I think Europe should improve if the season is anywhere near normal.
And everywhere else is kind of looking a little stronger in Latin America, looking little stronger I expect Asia will too.
The us market.
Prices for soft commodities, where they are today.
China continues to buy.
Yes market should look a little better next year, we'll see.
And then you've got all of our long range plan, we pegged to topline growth of 5% to 7%.
We are through our second year, we're right in the middle of that range from a from a two year growth rate perspective.
People should be thinking of FMC, delivering in that 5% to 7% range and 7% to 9% for EBITDA going into next year I don't have the exact number but certainly our long range plan through 2023 is on track that's how you should be thinking about it.
Thank you and the next question is from Alex Yefremov with Keybanc. Please go ahead.
Hi, yes. Thank you good morning, everyone just wanted to size.
The pricing versus a fax opportunity into next year.
From your 2020 brands it looks like Youre under recovering about 100 million of EBITDA.
Is that roughly equivalent to what do you expect to catch up next year.
Difficult to say at this point I'd like see.
We are certainly working with Latin America Asia.
To look at where are we going to be on pricing. We haven't built that model out yet, but you are right. We are we have recovered about 55%, we got about $100 million of pricing to go it all depends on what happens to FX does FX stay where it is.
Given where the election is does the dollar strengthen or weaken after the election, all those things come into play. So I think it's a little early to say.
There is a $100 million tailwind in pricing going into next year.
The next question is from Joel Jackson with BMO capital markets. Please go ahead.
Hi, Good morning, Mark you and your team have been engaging with investors more on S.G. The last few months, maybe you can share some of the feedback you've heard maybe some of the changes you might make in things you might do or your outlook your strategy from these conversations.
Certainly internally thanks.
Thanks, Joe Yes, listen it's a subject that is very close to my heart.
I passionately believe in sustainability in a company like ours with the marketplace that we operate in I think there are tremendous opportunities for us to to position at cincy as a sustainable company and a leader in this space.
You will have seen we made an announcement.
October we've now put in place a chief sustainability officer.
We have restructuring parts of the company to put that under our sustainability office.
For me it ties so closely into the technology platform that we have and we'll talk about that in two weeks time at the technology Investor Day.
I think the feedback we're getting is there is there is an appetite and a discussion around the types of chemistries that get used the latest technology is the more targeted technologies that are softer in chemistry. The biological approach to crop protection is also gaining a lot of traction and the combination of the two types of.
Chemistries together and then there is the whole the carbon footprint of companies that come into play how we think about our waste and our utilities, they're all part of managing the company and with the expectations of the various stakeholders that we have so I do see it as an important aspect you will see more from us and.
We're putting out some pretty ambitious goals for sustainability for the company that we will be reporting on on a regular basis, so more to come from this area.
Thank you and our final question will come from Chris Kapsch with loop capital markets. Please go ahead.
Yes, good morning.
Fairly straight forward, one sorry to touched on this already but there.
Theres been some incremental cost associated with business reductions from Covance on supply chain expediting.
Getting I guess your product closer to your customers ahead of time, so maybe even some working capital drag I'm. Just wondering if you see that normalizing into the 2021 season, if so what kind of opportunity from either a cost savings standpoint year over year or.
Squeezing a little cash out of working capital. Thanks.
Yes, you are right we have had that drag on costs I think we we said earlier on in the year. It was about $20 million of of of drag.
Frankly, I don't see that going away in the near term when you look at what is happening in Europe today in terms of.
Sort of the second wave, we have already being extremely proactive ahead of the next season of moving material.
Local warehouses distribution throughout Europe, rather than the lower cost model, where you use centralized warehousing, we're very cognizant of the fact that things are changing in Europe. So we've been very proactive in putting those those products out into the marketplace. While we know they're going to be needed and we have more of an opportunity to move them around that and.
Sales costs now that cost was built into this year. So I do I just expect it to kind of roll forward I don't I don't think you'll see a tailwind from that given where we offset in Q1 is is going to look very similar to Q4, I think and if.
If we see that wave growing elsewhere, we'll do the same thing in terms of.
Logistics costs moving products around et cetera. So we're very much at the forefront of this where we're very proactive we learned a lot over the last couple of years and we're applying those learnings, but they they do come with it at a cost.
Thanks for all the questions I would like to remind you about our investor technology update call in November 17th to provide an update on our R&D pipeline that's.
Thats all the time, we have for the call today, Thank you and have a good day.
This concludes the FMC Corporation conference call. Thank you for attending you may now disconnect.
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